A HELOC is a secured revolving loan that is given against your home’s equity. It offers a more flexible structure and lesser interest rates than the traditional loans like personal loans or credit cards. In addition, you can withdraw as much as you need upto your approved credit line limit. You can continue to withdraw funds if you pay the outstanding balance. Also, you only have to pay interest for the money you have used.
With all the benefits a HELOC comes with, it makes it a convenient option to apply for. However, there are few factors that play a key role in qualifying for a home equity line of credit. Here’s a step-by-step guide to help you qualify for a HELOC without any inconvenience.
1. Having enough Home Equity
A HELOC is a secured loan given against your home’s equity. Therefore, having enough equity in your home is necessary to qualify for the loan as your home serves as collateral. Lenders need to see if you have enough home equity before your HELOC gets approved.
Your home’s equity is basically the difference between market value of your home and the amount you owe on an existing mortgage. Usually you need 20% equity, however, some lenders may expect less.
2. Having a Good Credit Score
Having a good credit score is important for qualifying for an Amerisave HELOC. It shows your ability to repay the loan. Having a higher credit score can get you better interest rates and more favourable terms when it comes to repayment.
In addition, lenders have various preferences when it comes to credit scores. Usually a credit score of 620 or higher is needed to qualify for a HELOC. However, some lenders prefer above 680 too.
3. Lenders Prefer a DTI ratio of 43% or Lower
Debt to income ratio reflects your monthly debt payments against your monthly income. It gives the lender an idea that you can repay the loan easily, if you have a lower debt to income ratio. Lenders usually prefer a DTI ratio of 43% or lower for a safe side.
In addition, having a high credit card debt can affect your DTI ratio, making it difficult for you to qualify for a home equity line of credit.
4. Source of Stable Income
Another thing that helps you qualify for a HELOC is a stable source of income and employment. Stable source of income can build trust for lenders that you can pay the loan back easily. Also, it depends on your lender whether he needs extensive income verification or not.
Some lenders need documentation to see if you can repay the loan easily or not according to your source of income or employment.
5. Additional Considerations by Your Lender
Depending on your lender preference, you might need to show your ID, proof of stable source of income or tax returns. This further increases your chances to qualify for a HELOC.
In addition, make sure your mortgage and HELOC amount should not exceed 80-85% of your home’s appraised value. However, some lenders may allow higher loan to value ratio.
If you happen to fulfill the above mentioned key factors, chances are you’ll easily qualify for a HELOC with favourable terms and lower interest rates.